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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Caselet: Mrs Iyer, aged 55, holds a bond portfolio worth Rs 10,00,000 with a modified duration of 4.5. Her adviser expects yields to rise by 50 basis points across the curve. Using modified duration, what is the approximate change in portfolio value?

The portfolio value falls by about Rs 22,500. A 0.50% rise in yield times modified duration of 4.5 gives a 2.25% decline, and 2.25% of Rs 10,00,000 is Rs 22,500. Rising yields reduce bond prices.

  1. AIncrease of Rs 22,500
  2. BDecrease of Rs 22,500Correct
  3. CDecrease of Rs 2,25,000
  4. DDecrease of Rs 45,000

Explanation

Percentage change = -4.5 x 0.50% = -2.25%. On Rs 10,00,000 this is a fall of Rs 22,500. Rs 2,25,000 misplaces the decimal, Rs 45,000 uses 1% change, and an increase has the wrong sign.

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